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House Price Beliefs And Mortgage Leverage Choice

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  • Bailey, Michael
  • D�vila, Eduardo
  • Kuchler, Theresa
  • Str�bel, Johannes

Abstract

We study the relationship between homebuyers' beliefs about future house price changes and their mortgage leverage choices. From a theoretical perspective, whether more pessimistic homebuyers choose more or less leverage is ambiguous and depends on their willingness to reduce the size of their housing investment. When households primarily maximize the levered return of their property investment, more pessimistic homebuyers reduce their leverage to purchase smaller houses. On the other hand, when considerations such as family size pin down the desired property size, pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly-sized homes. To determine which scenario better describes the data, we empirically investigate the cross-sectional relationship between beliefs and leverage choices in the U.S. housing market. Our data combine mortgage financing information and a housing market expectations survey with anonymized social network data from Facebook. The survey shows that an individual's belief distribution about future house price changes is affected by the recent house price experiences of her geographically distant friends, allowing us to use these experiences as quasi-exogenous shifters of individuals' house price beliefs. We find that more pessimistic homebuyers make smaller downpayments and choose higher leverage, in particular in states where default costs are relatively low, as well as during periods when house prices are expected to fall on average. Overall, our results provide evidence for an important role of heterogeneous beliefs in explaining individuals' financial decision-making.

Suggested Citation

  • Bailey, Michael & D�vila, Eduardo & Kuchler, Theresa & Str�bel, Johannes, 2017. "House Price Beliefs And Mortgage Leverage Choice," CEPR Discussion Papers 12476, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12476
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    More about this item

    Keywords

    disagreement; heterogeneous beliefs; leverage; Mortgage Choice;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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